Masrani’s legacy at TD marked by failed land acquisition

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The biggest mistake in Toronto-Dominion Bank’s 169-year history is not how Bharat Masrani expected to end his 10-year tenure as CEO. U.S. allegations that TD facilitated $653 million in money laundering by criminal drug gangs in three states are all the Bay and Wall Street talk about these days when his bank is discussed.

Yet Masrani will be remembered in TD Bank’s history not just for undermining the bank’s standing with U.S. regulators, but also for stumbling upon a larger project, one that began in the mid-1990s under the leadership of Charles Baillie. As president and later CEO, Baillie embarked on an aggressive growth strategy that included major acquisitions, buying Waterhouse Securities in 1996 to complement the TD Securities business he had founded a few years earlier.

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In 2000, Baillie struck a deal with Ed Clark, CEO of Canada Trust, to buy the London, Ontario-based trust company. The acquisition would install Clark as CEO of a larger TD Bank in 2002 to continue Baillie’s work.

What was different about TD’s mid-1990s strategy that culminated in the merger with Canada Trust in 2000? It paved a new path to growth for TD that it had historically avoided: using big acquisitions to accelerate expansion. It was a change that Clark and his successor, Masrani, fully embraced.

For much of its history, TD has been a master of organic growth, a lower-risk strategy that relies on a mix of operational excellence and business acumen to drive expansion. This approach typically helps maintain operational efficiency through discipline and organizational culture. It requires the bank’s leadership to emphasize excellence in the execution of core banking principles.

These ideas were deeply ingrained in the bank’s DNA. The Bank of Toronto was founded in 1855 and the Dominion Bank was launched in 1871. Both were well-run from the start, focused on creating economic opportunity in and around Toronto and, after Confederation in 1867, western Canada. At a time in the early history of Canadian banking when so many banks were failing, neither bank was a cause for concern in Ottawa.

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In the typical quest for scale, however, most Canadian banks relied heavily on acquisitions in their early years. Bank of Montreal, Canada’s oldest bank (founded in 1817), had absorbed seven banks by 1925; Royal Bank went one better, buying eight banks in 1925; Scotiabank had acquired five by 1919; and Canadian Bank of Commerce — now CIBC — was a master of mergers, with 14 of them by 1961.

Dominion Bank and Bank of Toronto stayed out of this trend until 1955, when they merged to become Toronto-Dominion Bank. Interestingly, the new TD Bank followed an organic growth strategy that looked much the same as the strategy the banks had pursued individually before the merger. For many years, TD seemed to be the exception to the rule in Canadian banking, where acquisitions were the key to successful growth.

After purchasing Canada Trust in 2000, TD set its sights on the U.S. retail banking market. In 2005, TD spent $3.8 billion on Banknorth, taking a majority stake in the New England bank, which it renamed TD Banknorth. Three years later, TD acquired Commerce Bancorp, which had branches in New York, Pennsylvania, Washington, D.C., and parts of Florida. Toronto-Dominion Bank, an Ontario-born institution that had originally served the industry, agriculture, and development of western Canada, had become TD Bank, “America’s Most Convenient Bank.”

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Masrani’s contribution to this strategy was TD’s $13 billion deal to buy U.S.-based First Horizon Corp. The First Horizon acquisition, announced in February 2022, would have expanded the Canadian bank’s footprint across 12 southeastern states and added more than a million new business and consumer customers. But U.S. regulators were having none of it, and it was eventually revealed that anti-money laundering lapses were a big part of the problem. In May 2023, with regulatory approval nowhere in sight, the deal was terminated.

In the course of its strategy of growth through acquisitions in the U.S., TD Bank lost the operational effectiveness and discipline that had historically been the foundation of its success. How that success came about is no mystery. In 1915, the Bank of Toronto published a 119-page book with 1,001 rules that it gave to its employees, explaining how to run a safe, profitable bank.

Rule 302 is as relevant today as it was then. It states that bankers must be satisfied “as to the circumstances and character of the customer before accepting business” and that “the legal responsibility which the bank must necessarily assume … makes dealing with strangers risky, out of all proportion to the possible profit to be derived.”

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For Raymond Chun, who will become TD’s next CEO in 2025, it might be helpful to read the Bank of Toronto’s booklet on how to run a healthy bank. It symbolizes what fosters success in banking. Namely, that growth can only be sustained if the fundamental principles of banking are understood and lived as a matter of course. These were the building blocks of Toronto-Dominion Bank’s fortunes for much of its history.